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Even climbing Lloyds (LSE: LLOY) share price was due to come back down to earth at some point. And yesterday (5 February) it did just that, dropping 5.6%. What’s going on?
I FTSE 100 the bank has had a very good career. Even after that one-day drop, its stock is up 70% over the past year and up more than 150% over the past two. I’ve had a pretty good ride myself, especially when reinvested earnings are included. I knew it wouldn’t last forever, but yesterday’s drop still surprised me.
The rival appears to be the Bank of England’s decision to hold base rates at 3.75%. That sounds like an unlikely catalyst. Prices didn’t budge, after all. But the vote was close, with the monetary policy committee split 5 to 4. More importantly, governor Andrew Bailey said the evidence is in favor of future cuts “growing”.
FTSE 100 banks all fell
This is good news for many businesses, but not for banks. Higher interest rates have allowed lenders to widen interest margins, the gap between what they charge borrowers and savers. That has been a major driver of bank profits in recent years. Now the trend may reverse. Still, the stock’s decline felt more intense on such rising news. But as the UK economy slows, the housing market slows and unemployment rises, there are other things to worry about. Especially Lloyds, which is very focused on the UK domestic market.
NatWest Groupwhich is similar to the UK-centric one, it was even worse down by 6.02% yesterday. Barclays again HSBC Holdings share pricewith its major foreign exposure, down 3.48% and 2.29%, respectively. But low prices remain a concern for the entire sector.
Today, Halifax reported a modest increase in house prices of 1% over the past 12 months, and warned that affordability remains a challenge for many buyers. While the reduction in the mortgage rate should help, this may not be enough to ease the pressure on margins.
Lowered stock target
It probably didn’t help that on Tuesday, Shore Capital downgraded Lloyds from Hold to Sell, arguing that its strong performance had left the shares undervalued. The broker has raised its price from 84p to 91p, but that is still below today’s 106p.
It also warned that Lloyds may struggle to continue to restore tangible equity in the long term, citing competitive pressures and the risk of tax increases in the near future. “unusual” refunds are ongoing. The big banks escaped an extra charge in November’s Budget, but the threat is not over.
Despite the volatility, Lloyds is trading at about the same level as last week. With a price-to-earnings ratio of 15.1, it’s inexpensive and inexpensive. The yield has fallen to 3.43%, but as the board recently increased the interim dividend by 15%, we can expect this to rise over time.
There is no way I am selling. I plan to hold Lloyds for decades and reinvest the entire dividend to allow the merger to do its job. But after the red heat, I expect stocks to cool down. New investors may want to wait for the dip, and consider buying with a long-term perspective. The recent exuberance may have died down for now.
